Foreign card buy may turn into a booby trap

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The days of waiting in a queue for foreign exchange is over, with technology making global travel a lot easier for you. All that you need is a credit card. However, any technology would have some loopholes that might burn a hole in your pocket at times. So it is wise to keep yourself updated about such loopholes to ensure that your liability does not shoot up. This homework may also give some extra leverage for your spending budget on your foreign trip.
One of such major drawbacks in the use of the international credit card is the dynamic currency conversion (DCC) or cardholder Preferred Currency (CPC) service. Let’s understand the problem and try to figure out a strategy to avoid it.

What is it?

Dynamic currency conversion (DCC), also designated as cardholder preferred currency (CPC), is a service provided by merchants (not network service providers like Visa or MasterCard) in some foreign countries, where you go on vacation or some business trip.
If you agree to use the DCC service, the merchant will convert the transaction amount of purchase at the point of sale from the currency in which the price is displayed — the foreign currency — into your domestic currency using an exchange rate that typically includes a service charge.
Catch: The currency exchange rate charged by these merchants is over and above the wholesale exchange rate being offered by Visa or MasterCard normally.
how does it work?

When Abhi was in Singapore, he decided to purchase a jacket using his SCB international credit card. The price tag on the displayed Jacket in the store was 20 Singapore dollars.
At the payment counter, the cashier offers him two options — pay either in SGD or make the payment in Indian rupees using the DCC service. He didn’t know the difference between these two modes. But he opted for DCC as he felt comfortable with the idea that the amount will be displayed in Indian rupees.
Abhi, however, was shocked when the cashier informed him that the amount that he needs to pay would include charges for exchange rate conversion, which is a 2.5 per cent mark-up over a wholesale exchange rate, and a 2.5 per cent service fee. Despite paying five per cent more, he could not say anything as he himself had chosen the DCC option.

The costs of DCC

If a customer chooses the DCC option for making payments, he is approximately overcharged by five to seven per cent. It’s a case of nice profit margin for banks just by making the customer choose DCC option. Some merchants, especially restaurants and merchants in parts of Asia and Europe, may even use the DCC option without asking you.

Costs in over-the-counter model

If you don’t use the DCC option, you would pay the wholesale currency conversion rate. So you can save approximately three per cent in the currency conversion and 2.5 per cent to 3.5 per cent on the DCC service charge. Visa and MasterCard also charge a fee in the range of one to two per cent for the currency conversion but these charges are comparatively better than the charges applied for DCC.

How to avoid trap?

If a merchant offers this service, you should always decline it. Since the rates of conversion used are frequently higher than any fee, you are liable to pay for having the billing done in the foreign local currency.
Foreign merchants may also overcharge you by 6.5 per cent to seven per cent, when they charge you in your domestic currency.
As a precautionary practice, you need to ask the merchant to recalculate the amount in the foreign local currency and cross check if the figure in the receipt matches with that on the price tag.
In some cases, the merchant may claim that their credit card terminal automatically does the conversion, but Visa and MasterCard agreements generally require the merchant to offer transactions in foreign local currency. It is advisable to abandon the transaction, if the merchant doesn’t give you any option other than the DCC.

your rights in DCC

Visa and MasterCard require the merchant to disclose the DCC charges and they must provide the customer with a choice of getting the bill in foreign or the domestic currency. If you do not want to use the DCC when making a purchase, then you have the right to refuse the offer and have your transaction billed in the foreign local currency, which will then use the conversion rate of Visa or MasterCard. If you did not agree to DCC, but have been charged for it, then you can ask your issuing bank to revert back the charges.

(The writer is the CEO of bankbazaar.com)